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Only recently considered a basket case, Latin America seems to be blessed with strong growth, relatively low inflation and open markets. But that reflects past reforms made by politically bold leaders, said Luis Rubio, president of Mexico's Center of Research and Development. Today, he said, "that first era of reform is over. I don't see a single important reformer in Latin America." Not unlike the situation in India, the public sees few benefits from the impressive modernization in key countries like Mexico, Brazil and Argentina, as unemployment remains stubbornly high and real wages fall. Warned Rubio: "It's a pocketbook issue, and the pocketbook is getting emptier by the day." With the spirit of deregulation on the wane, the region is vulnerable to a renewed outbreak of what Rubio called "the Latin American disease, the tendency of politicians and bureaucrats to micromanage everything."
In Mexico, "the political situation is very delicate and the whole edifice is fragile," said Rubio, while Brazil's fortunes hinge on a proposed constitutional amendment to allow President Fernando Henrique Cardoso to run for a second consecutive term. Argentina faces a different kind of structural problem, Garten said: "They have a high-wage economy and 18% unemployment. The country is importing massive amounts of equipment to substitute for labor, but there's no scenario to retrain the workers. That's going to create real political tensions."
A danger lurking beneath the surface for most Latin countries is their dependence on "hot" foreign money, unlike Asia, where outsiders are building factories and growth is financed out of high domestic savings. The problem: "An increase in U.S. interest rates would suck money right out of Latin America," Garten warned, "and create Mexican-style problems for all the major countries."
The good news for Latin America and for much of the rest of the globe is that the new, stable American economy seems to offer a strong foundation for growth elsewhere. That should continue as long as business executives and economic policymakers keep the Goldilocks economy from going too fast, which would raise interest rates, or slowing down too much, risking recession. The goal is to make it just right. Although Americans themselves would be the first to feel the consequences of any missteps, one of the lessons of today's globalized economy is that, unlike the fairy tale, everybody's at risk from the bears in the forest.
--With reporting by Thomas Sancton and Anthony Spaeth/Davos